ACC/ACF2100 Financial Accounting 2019 Semester 2

Individual Assignment

Weighting: 10%

Due date: Monday 14th October by 4pm (Week 11)

Submission requirement:
1. A hard copy of the assignment must be submitted in the relevant assignment box on your
home campus by the due date.
 Hardcopy must be accompanied by a completed and signed assignment coversheet as
the front cover page of your report. The assignment coversheet file is uploaded on
Moodle. Failure to do so will result in a mark deduction.
 On the assignment coversheet, students MUST clearly indicate their tutorial day, time,
and tutor name. Failure to do so will result in a mark deduction.
 The submission box will be placed later (roughly one week before the deadline). The
locations of the submission box will be:
o ACF2100 (Caulfield): Building H, Level 3, Accounting Department reception counter.
o ACC2100 (Clayton): Menzies Building (20 Chancellors Walk), Level 10 East, at the
entrance of the corridor.

AND

2. A soft copy of the assignment must be uploaded to Moodle by the due date.
 The Moodle link for the soft copy submission will be created later (roughly one week
before the deadline).

Failure to meet one or both submission requirements will result in late penalties being
applied.

General assignment instructions:

This is an individual assignment. Plagiarism and collusion are prohibited.
Marks are also allocated for effective presentation of your written work.

Return of marks:
Marks will be made available to students through Moodle.

Extensions of time and penalties for late lodgement:

A penalty of 10% of the total mark allocated to this assessment task will be deducted for each
day, or part thereof, it is late. Applications for an extension of time allocated to an in-semester
assessment task must be made by completing the in-semester special consideration
application form. The application form must be submitted to the Chief Examiner for
consideration no later than two University working days after the due date.

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 ACC/ACF2100 Financial Accounting 2019 Semester 2
Individual Assignment
(Include this question page in your report)
Office Use Only
Presentation
Effectiveness
Question Question Total
(including the cover
sheet requirement)
Marks allocated 70 10 80

Marks received

On 1 July 2017, Parent Ltd acquired all the shares of Son Ltd, on a cum-div. basis, for
$3,230,000. At this date, the equity of Son Ltd consisted of:

Share capital – 600 000 shares $ 1,200,000

General reserve 500,000
Retained earnings 900,000

At the acquisition date, Son Ltd reported a dividend payable of $50,000 and its assets
included $100, 000 of recorded goodwill. The dividend payable at the acquisition date was
subsequently paid in August 2017.

On 1 July 2017, all the identifiable assets and liabilities of Son Ltd were recorded at
amounts equal to fair value except for the following:

Carrying amount Fair value

Land $500,000 $650,000
Inventory 20,000 30,000
Plant (cost $350 000) 250 000 300,000

The land on hand at the acquisition date was sold in March 2018. Of the inventory on hand
in Son Ltd at 1 July 2017, 60 percent was sold in November 2017 and the remainder was
sold in July 2018. The plant was estimated to have a further 5-year life with zero residual
value.

Son Ltd was involved in a court case that could potentially result in the company paying
damages to customers. At the acquisition date, Parent Ltd calculated the fair value of this
liability to be $30,000, even though Son Ltd had not recorded any provision for damages
(liability). On 29 June 2019 Son Ltd reassessed the liability in relation to the court case as the
chance of winning the case had improved. The fair value on 29 June 2019 was considered to
be $10,000.

The company applies the partial goodwill method. The income tax rate is 30%.

During the period 1 July 2017 to 30 June 2019, the following intragroup transactions have
occurred between Parent Ltd and Son Ltd:
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(T1) At 30 June 2019, Parent Ltd approved and declared a final dividend of $80,000 and
Son Ltd approved and declared a final dividend of $50,000. Son Ltd subsequently paid
its dividend on 20 August 2019.

(T2) On 1 October 2018, Parent Ltd issued 5,000 10% debentures of $100 at nominal value.
Son Ltd acquired 1,000 of these. Interest is paid half-yearly on 31 March and 30
September. Accruals have been recognised in the legal entities’ accounts.

(T3) On 1 March 2019, Son Ltd sold equipment to Parent Ltd for $100,000. The equipment
had an original cost of $150,000. At the time of sale, the carrying amount of the
equipment was $80,000. Son Ltd had treated the asset as a depreciable non-current
asset, being depreciated at 10% on cost, whereas Parent Ltd records the equipment as
inventory. Parent Ltd sold this asset to Beanie Ltd on 15 June 2019 for $90,500.

(T4) On 1 January 2018, Son Ltd acquired furniture for $70,000 from Parent Ltd. The
furniture had originally cost Parent Ltd $100,000 and had a carrying amount at the
time of sale of $80,000. The sale was made on credit and, at 30 June 2018, $30,000
was outstanding. At 30 June 2019, $10,000 was still not paid and outstanding. Both
entities apply depreciation on a straight-line basis. At 1 January 2018, the furniture
had a further five years of useful life, with zero residual value.

(T5) On 3 December 2018, Son Ltd sold inventory to Parent Ltd for $96,000. The transfer
price included a mark-up of 20% on cost. At 30 June 2019, 30 percent of this inventory
was still on hand.

Required:
a) Prepare the acquisition analysis at 1 July 2017. (11 marks)

b) Prepare the consolidation worksheet entries at 30 June 2019. Your answer should include:
1. BCVR entries,
2. Pre-acquisition entries, and
3. Intragroup transaction adjustment entries (T1 to T4).
(53 marks)

c) The adjusting consolidation entries at 30 June 2019 for the last intragroup transaction (T5)
is provided below.

Sales revenue Dr 96 000

Cost of sales Cr 91 200
Inventory Cr 4 800

Deferred tax asset (30%) Dr 1 440

Income tax expense Cr 1 440

Explain why the above entries are made for T5, noting the adjustments to each account
separately.

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 (6 marks)

Presentation requirements:

 Report must be typed and printed. Failure to do so will result in mark deductions.
 Ensure all intra-group transaction adjustments are correctly labeled as T1 – T4. Failure
to do so will result in mark deductions.
 Try your best to construct your report as effective as possible.
 Narrations must be provided and show all workings.

Provide your solutions from here.

Acquisition analysis:

At 1 July 2017

FVINA of Son Ltd.

Equity: $
Share Capital 1,200,000
General Reserve 500,000
Retained Earnings 900,000

Assets and Liabilities:

Land + 150,000 (1 – 30%) = 105,000
Inventory + 10,000 (1 – 30%) = 7000
Plant + 50,000 (1 – 30%) = 35,000
Recognition of Provision for Damages - 30,000 (1 – 30%) = 21,000
Goodwill - 100,000

Net Fair Value acquired 2,626,000

Consideration Transferred 3,230,000 – 50,000 (Dividend receivable) *

3,180,000
Goodwill acquired 3,180,000 – 2,626,000
554,000
Unrecorded goodwill 554,000 – 100,000
454,000

*Dividend receivable deducted as ‘cum-div’ is

stated

The consolidation worksheet entries at 30 June 2019 are:

BCVR Entries:

Debit ($) Credit ($)

Accumulated depreciation - Plant 100,000
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 Plant 50,000
Deferred tax liability 15,000
BCVR 35,000
(Valuation adjustment for Plant)

Depreciation expense* 10,000

Retained Earnings (1/7/18) 10,000
Accumulated depreciation - Plant 20,000
*(300,000 – 250,000) / 5
(Depreciation adjustment, from FV
and CV)

Deferred tax liability 6000

Income tax expense** 3000
Retained earnings 3000
** 10,000 (depreciation) x 30% (tax
rate)
(Tax effect on depreciation
adjustment)

Debit ($) Credit ($)

Coat of sales 4000
Income tax expense 1200
Transfer from BCVR 2800
(Valuation adjustment on sale of
remaining inventory)

Debit ($) Credit ($)

BCVR 7000
Deferred tax asset 3000
Provision for damages 10,000
(Adjustment for provision for damages
for court case)

Transfer from BCVR 14,000

Income tax expense 6000
Provision revenue 20,000
(Tax affect from provision for damages
adjustment)

Pre-acquisition entries:

Debit ($) Credit ($)

Retained earnings * 1,009,200
Share Capital 1,200,000
General Reserve 500,000
BCVR ** 16,800
Goodwill 454,000
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Shares in Son Ltd. 3,180,000

Transfer from BCVR (RE) 2800

BCVR 2800

BCVR 14,000
Transfer from BCVR 14,000
(Pre-acquisition entries required for
consolidation)
*Original RE = 900,000 + (650,000 –
500,000) (1 – 30%) for land sold this
period + (30,000 – 20,000) (1-30%) x
60% for 40% remaining inv sold during
last period
**2800 (inventory sold current
period) + 35,000 (valuation of plant) –
7000 – 14,000 provision for damages

T1
Debit ($) Credit ($)
Dividend Payable 50,000
Dividend declared (RE) 50,000

Dividend revenue 50,000

Dividend receivable 50,000
(Reversal of dividend not yet paid)

T2
Debit ($) Credit ($)
10% debentures 100,000
Debentures in parent 100,000

Interest revenue 10,000

Interest expense 10,000
(10% x 100,000)
(Adjustment for debentures & interest
paid intragroup)

T3
Debit ($) Credit ($)
Proceeds on sale of equipment 100,000
Carrying amount of equipment sold 80,000
Cost of sales 20,000
(intragroup sale of equipment
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 adjustment)

T4
Debit ($) Credit ($)
Proceeds on sale of furniture 70,000
Furniture 10,000
CA of furniture sold 80,000
(Intragroup sale of furniture)

Income tax expense 3000

Deferred tax liability 3000
(10,000 x 30%)
(Tax effect of intragroup adjustment)

Retained earnings* (30/6/18) 1000

Depreciation expense** 2000
Accumulated depreciation 3000
*(([80,000 – 70,000) / 5] x 0.5 years =
1000
**(([80,000 – 70,000) / 5] = 2000
(depreciation adjustment for
intragroup sale of furniture)

Deferred tax liability 900

Income tax expense 600
Retained earnings (30/6/18) 300
(Tax effect on depreciation
adjustment)

Income payable 20,000

Income receivable 20,000
(30,000-10,000)
(Income payable remaining)

C.
This transaction involves a sale of inventory from Son Ltd to Parent Ltd during the period from 1 July
2018 to 30 June 2019, with 70% of this inventory being sold within this period. The sale price of the
inventory was $96,000 while the cost price was only $80,000. This indicates that in the records of Son
Ltd, revenue has been recorded. However, from the group’s perspective, if the purchasing entity has
not sold all of the acquired inventory, an unrealised profit exists.

During the consolidation process we must eliminate some entries. The debit of Sales revenue for
96,000 is required to reverse the recording of Sales revenue in the records of Son Ltd, as it is usually
credited to increase profit upon a sale.
The credit of Cost of sales for $91,200 is done for a similar, but reversed reason, as we have to reverse
the initial debit of this expense recorded in the books of Son Ltd.
The credit of inventory of $4800 is done to eliminate the difference between the inventory entries of
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Parent and Son Ltd remaining at that date. Parent had recorded $96,000 debit of inventory while Son
Ltd recorded only an $80,000 credit, the difference between these is $16,000.
As at the 30 June 2019 only 30% of the initial inventory remained, the difference between the
inventory entries of the accounts of Parent and Son Ltd of $16,000 must be times by 30%, giving the
value of $4800. This value recognises that some of the initial unrealised profit has been realised
through the sale of the inventory to a third outside party. Therefore, only 30% of this profit remains
unrealised which has been eliminated by this reversal.

The debit of deferred tax asset of $1440 is done to recognise that through a reduction in the asset
inventory a deductible temporary difference (DTD) has been created which results in a deductible
amount in the future, creating a deferred tax asset. This value is acquired from multiplying the
inventory amount by the tax rate of 30% (4800 x 30%).
The income tax expense is credited as it recognises that profit has been reduced with the elimination of
the sale.